Popular Liquidity Ratios List

Liquidity Ratio Analysis

A Liquidity ratio should not be viewed in isolation but looked at over a period of time using trend analysis and in comparison to other businesses in your industry.

In addition, in order to give a full picture of what is happening, they should be viewed relative to other ratios calculated for the business such as profitability ratios, efficiency ratios, leverage ratios, activity ratios, and investor ratios.

The higher the ratio the more liquidity the business has and the less risky it is seen to be. However, a balance needs to be met as a ratio which is too high implies a lot of money tied up in current assets. It is generally accepted that money tied up in this way earns very little or nothing for the business and is not acceptable.

Liquidity Ratio Formula

There are numerous examples of liquidity ratios, however, it is important to select the key ratios which relate to your business. The industry sector, size, and complexity of the business will determine the most appropriate ratios to use and many may not be relevant or worth calculating, particularly for a small business.

List of Useful Liquidity Ratios Formula

Liquidity Ratio

Formula

Current Ratio

Current Assets / Current Liabilities

Quick Ratio

(Current Assets – Inventory) / Current Liabilities

Last modified July 16th, 2019 by Michael Brown

About the Author

Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years in all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a BSc from Loughborough University.